Remodelers to Benefit : Builders' Report Sees Slower Times Ahead

The National Assn. of Home Builders has taken a peek at the future--specifically the rest of the century--and, by and large, it doesn't particularly like what it sees ahead.

Builders have always tended to be less optimistic than real estate brokers--at least in their public pronouncements--and "Housing America--The Challenges Ahead" does nothing to alter that image. The association's report was released at its recent annual convention in Houston.

Slower population growth and household formation, the continued growth of the Sun Belt and decline of the Northeast and Midwest, financial deregulation, the elimination of many federal programs for financing state and local highways, bridges, sewer and water systems and, perhaps most significant, the threat of tax reform, will all alter the way many builders do business.

If builders had their way, every day would be like a summer day in the early 1960s, with interest rates in the 5% or 6% range and housing affordability at its zenith.

But it's 1985, and the prospects are better for builders who are skilled in remodeling than those who specialize in huge tracts, especially in areas of relatively low growth. This has always been the case in places like Milwaukee, Cleveland, Omaha, Minneapolis-St. Paul and many East Coast cities, where remodeling is a way of life.

Conversion, rehabilitation and the renovation of large single-family homes into two-or-more family dwellings will add 3.4 million units to the housing stock in the 1980s and 3 million in the 1990s, the report concludes.

Slower household growth, along with more intensive use of the existing inventory, will reduce new housing construction to only about 15 million units in the 1980s and 14-15 million in the 1990s, well under the more than 17 million in the 1970s.

Household formations are expected to decline from 16.8 million in the 1970s to 14.1 million in the 1980s to 12-13 million in the 1990s. Much of this slower growth can be attributed to the aging of the baby boom or "Big Chill" generation; more than 30 million members of this group, now aged 35 to 44, own their own homes.

Lucrative Area

The years ahead will be marked by a shift away from first-time buyers to move-up buyers, including the aging baby boomers and those 65 or older.

After flirting with condominiums and recycled warehouses, many of the baby boomers are or will be in the market for traditional single-family houses. Since both husband and wife are typically in the work force at attractive salaries, these move-up houses could be a lucrative area for builders. This return to single-family living may be related to the much publicized new conservatism of the Yuppie generation.

Too, strong demand in the over-65 age group will increase the need for alternative housing, including congregate and other types of shared housing designed to reduce housing costs and to provide older people with cost-effective health and personal-care services, the report predicts.

The deregulation of the home- finance delivery system may have produced a "more flexible and resilient" system, but the cost of credit is still too high for many potential home buyers, the report adds. The outlook for rental housing construction is particularly gloomy in the light of high--relative to inflation--interest rates.

But perhaps the most fear and loathing at the association's Washington headquarters is reserved for the specter of tax reform. Everyone wants tax reform--for the other person or agency--and builders are no exception.

All of the three major tax reform proposals vying for national attention would retain the all-important deduction for home mortgage interest for principal residences, but virtually nothing else would remain the same.

Least Effect

Under the Treasury Department's proposal, according to a computer model by the association, total housing construction could drop by as much as 25% to 30% during the first year under the new code.

Of the three proposals--Treasury, Bradley-Gephardt and Kemp-Kasten--the latter, sponsored by Rep. Jack F. Kemp (R-N.Y.) and Sen. Robert W. Kasten Jr. (R-Wis.), would have the least effect on housing production. Bradley-Gephardt is sponsored by Sen. Bill Bradley (D-N.J.) and Rep. Richard A. Gephardt (D-Mo.).

The report's gloomy conclusion: "Major tax reform, proposed under the guise of simplification, could remove the underpinnings of the national policy favoring home ownership and rental housing."